Contractor's Guide to Expenses

Firstly, how do expenses affect my tax bill?

You’ll probably incur some expenses during the course of your contracts, simply pay for these with your own money and then your company will reimburse you. To do this you’ll just need to do either a bacs transfer from your business bank account or write yourself a cheque from your company bank account cheque book.

Please be aware the next bit is very simplified and doesn’t include everything but it will hopefully help you understand how expenses affect your tax bill, for a more detailed explanation it’s best discussed with your accountant.

Expenses aren’t taxed, so if your contract is for example £10,000 a month and you didn’t have any expenses this month and you withdrew all the £10,000, you would pay tax on the full £10,000.

However, if you had £2,000 of expenses, you would now only pay tax on the £8,000 and pay less tax. It doesn't work exactly like this as it doesn't include the effect of your PAYE salary, dividends or even the flat rate VAT scheme but hopefully it will give you a basic understanding of how expenses affect your tax bill.

Remember! You must be able to provide evidence you actually incurred the expense, if HM Revenue and Customs ever ask you. This is usually achieved by keeping receipts.

What expenses can I claim as a Contractor working through my own limited company?

HM Revenue and Customs have produced a heavyweight 100 page guide called: 'Expenses and benefits - A tax guide'. However, if you don’t have the time to read this epic, find below SJD’s handy guide.

If you’re a contractor working through your own limited company and are outside IR35 then life is very simple. HM Revenue and Customs rules state that expenses can be claimed provided they are wholly and exclusively for the purposes of your business. This means you can claim things like: company formation fees, accountancy fees, business travel and accommodation, postage, stationery, telephone calls, employer’s N.I. contributions, subscriptions, insurance, contributions to an executive pension plan, business entertainment etc.

What is a valid business expense?

Meal allowance

You can claim actual meal costs whilst you are working at a remote site, away from your normal place of work, or when staying away from home overnight, but daily, round sum claims for meals are not permitted.

Travel expenses

You can claim the cost of travel to and from your temporary place of work. Mileage rates are 45p per mile for the first 10,000 miles in any fiscal year and then 25p per mile thereafter. This allowance is to cover fuel and running costs of the vehicle. If you are travelling to work as a passenger in a car you are entitled to claim 5p per mile. You can also claim for parking and the congestion charges but you may not claim for parking fines or speeding fines. The cost of travel by public transport can be claimed but you must have a valid receipt. A mileage allowance can also be claimed for travel by motorcycle and bicycle at rates of 24p per mile and 20p per mile respectively.

Accommodation

The cost of hotel or bed and breakfast accommodation can be claimed as an expense, as can the reasonable cost of additional meals taken in conjunction with overnight accommodation. There are no set allowances for accommodation but the cost must be deemed to be 'reasonable'; this also applies to the cost of meals.

Clothing

You cannot claim for ordinary clothing which would form part of an 'every day' wardrobe even if you would not be likely to wear your working clothes anywhere other than at work.

Training

Providing the training course is wholly and totally relevant to the performance of your duties under your existing contract then you can claim this as an expense

Pensions

Pensions are big news as they represent one of the few remaining tax breaks available to contractors. You can invest part of your income into a Company pension scheme. You save not only the income tax that would ordinarily be payable but due to the pension contribution, your employers and employees national insurance contributions are lower than they would have been. The amount of tax relief can be as much as 48% meaning that for each £100 invested you pay £52 and the tax man pays the rest.

What if I’m inside IR35, what expenses can I claim?

If your contract is caught by IR35 then the only expenses claimable are: administration expenses which are fixed at 5% of your contract income, travel and accommodation expenses, pension contributions and certain professional subscriptions. You should however, still record and receipt all business expenses.

Do I need to keep my receipts?

It is advisable to hold onto your receipts because although your accountant will not need to see them, the Revenue, if they choose to investigate, can go back as far as six years

One final word, remember you cannot claim for something you didn’t actually pay for in the first place, or can’t provide evidence that you did. You will be personally liable for any underpaid taxes NOT the company you're working through or taking advice from. You should therefore steer clear of companies and scheme providers promoting generous expense allowances with 'NO' receipts required.

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If you have any questions about contracting or would like any further advice please call our new client services helpdesk on Freephone 0500 152500 / 01442 275789 or email: nikki.hanlon@sjdaccountancy.com.

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 14,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

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All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee of £120 plus VAT per month.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on Freephone 0500 152500 / 01442 275789 or email: lisa.wood@sjdaccountancy.com.

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.